Crypto and blockchain have promised many new innovations and business ideas, and amidst the claimed scams and cash-grabs of the ICO boom and roaring (then falling) NFT market, one project stood out as providing an innovative use-case for NFTs as a tradeable membership token, similar to how fans can presently procure season tickets or (if they are rich enough, debenture seats in stadiums, and potentially enable leasing out or transfers of those membership with lower costs than has occurred before.
We wrote it up at the time and said that:
The membership opportunities for NFT holders to interact as part of an exclusive club are only just starting and more experiments of this kind are sure to come.
The basic idea was that two different NFT tokens would entitle holders to different special access at the restaurant, including for private dining. The sale netted US$14.8M for the sellers and some NFTs were retained future sale, and with a plan for additional clubs, offerings and social experiences. Unfortunately, the US Securities and Exchanges Commission has, in the words of dissenting Commissioners Peirce and Uyeda:
with the many demands on its time and resources, inexplicably has decided to focus on membership in an exclusive dining club
There is no allegation of fraud, and the floor price of the NFTs is remarkably stable compared to the broader NFT market, but the SEC has irrespective sued FlyFish and entered into a somewhat peculiar settlement deal on a no admissions basis under which FlyFish must destroy any remaining NFTs it holds, not accept any royalties for secondary sales of the NFTs, delete links to crypto exchanges on their website and social media, and pay a US$750,000 penalty.
The press release concerning the claim by the SEC merely asserts the NFTs were an "unregistered offering of crypto asset securities", which is interesting as the SEC has just had to apologise to a Court for using the phrase "crypto asset securities" which has no meaning under law. There is no guidance or explanation of how the NFTs are said to have comprised securities other than the SEC alleging (with good grounds it seems) that:
Flyfish told investors that they could potentially profit from FlyFish's efforts
The dissenting Commissioners assert the NFTs sold "are utility tokens, not securities", and that:
A well-known artist who sells a limited set of numbered prints may be selling to a couple who wants to display her art in their home, or to someone who wants to turn around and sell it for a profit and is making a bet on the artist’s future. The intent of a buyer cannot transform a non-security into a security.
In a rare case of regulators making the case for less regulation, the dissenting Commissioners point out that:
The securities laws are not needed here, and their application is harmful both in the present case and as future precedent. The Flyfish NFTs were simply a different way to sell memberships. Why shouldn’t a chef be able to sell memberships to eat at her kitchen table and to collect royalties on resales of those memberships? NFTs offer a promising way to allow creative people—such as chefs, musicians, or visual artists—to monetize their talent and a potentially efficient way for selling access to experiences and communities.
The dissent casts a wide net in their closing comments, hooking the need for expensive lawyers in the web3 space:
Creative people should be able to experiment with NFTs without having to consult a high-priced tea-leaf reader—ahem, lawyer. The Commission can change its menu to include a healthy serving of guidance to give non-securities NFT creators the freedom to experiment.
A further school of no-admission settlements are expected as the US election looms and the present SEC rushes more regulation by enforcement before a possible change in the policy approach in the US. Other jurisdictions will hopefully learn that industry consultation and workable regulation is the best path to provide consumer protection and encourage innovation.
By Michael Bacina
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